Direct Lending Credit Trends Stable, Non-Accruals Below Average: Goldman Sachs

Credit quality in the direct lending sector remains relatively stable, with key risk indicators tracking below historical averages, according to a recent analysis by Goldman Sachs. The bank's assessment, which covered approximately $500 billion in private loans, found that the market is showing signs of resilience and recovering activity.

Key Credit Metrics

Goldman Sachs reported that fundamental credit trends within its analyzed portfolio are holding steady. The findings provide a significant data point for a private credit market that has grown substantially in recent years.

Key takeaways from the report include:

• Non-accruals: Loans not making timely interest or principal payments are tracking at less than 2%, a figure below historical averages for the sector.
• Watchlist Trends: The number of loans being closely monitored for potential credit deterioration remains stable, as do payment-in-kind (PIK) trends.
• Lending Spreads: Spreads in direct lending are currently about 50 basis points wider than the tight levels observed in 2025, suggesting slightly better compensation for risk.

Market Activity and Investor Flows

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The report also pointed to a nascent recovery in deal-making. Sponsor-led activity in the third quarter is showing an improvement compared to the second quarter, indicating a potential pickup in transaction volumes.

On the retail investor side, Goldman Sachs anticipates a decline in redemption requests for non-traded business development companies (BDCs). The bank projects third-quarter redemptions will fall to around 10% from approximately 15% in the prior quarter. Despite this improvement, most non-traded BDCs are still expected to experience net outflows through the first quarter of 2027 and are underperforming liquid benchmark returns year-to-date, according to the bank.

Manager Positioning

Goldman Sachs identified several firms as being well-positioned based on factors like strong trailing twelve-month returns, smaller legacy loan books, and lower redemption queues. The bank highlighted TPG, Brookfield Asset Management (NYSE:BAM), StepStone Group (NASDAQ:STEP), and BlackRock (NYSE:BLK)/HPS in this category.

Furthermore, the bank noted that managers with significant amounts of undeployed institutional capital are poised for faster growth as market activity recovers. Ares Management (NYSE:ARES) was cited as an example of a firm positioned to capitalize on this dynamic.